FORM 10-Q
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-2346
SOUTHWESTERN BELL TELEPHONE COMPANY
Incorporated under the laws of the State of Missouri
I.R.S. Employer Identification Number 43-0529710
530 McCullough, San Antonio, Texas 78215
Telephone Number: (210) 821-4105
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF SBC COMMUNICATIONS INC., MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS
THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
- ------------------------------------------------------------------------------------
STATEMENTS OF INCOME
Dollars in millions
(Unaudited)
<CAPTION>
- ------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
-----------------------------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues
Local service $ 1,414 $ 1,307 $ 2,780 $ 2,561
Network access
Interstate 600 518 1,179 1,083
Intrastate 280 270 552 540
Long-distance service 192 205 381 416
Other 289 242 557 477
- ------------------------------------------------------------------------------------
Total operating revenues 2,775 2,542 5,449 5,077
- ------------------------------------------------------------------------------------
Operating Expenses
Cost of services and products 1,066 970 2,091 1,908
Selling, general and administrative 483 615 914 1,040
Depreciation and amortization 496 503 976 965
- ------------------------------------------------------------------------------------
Total operating expenses 2,045 2,088 3,981 3,913
- ------------------------------------------------------------------------------------
Operating Income 730 454 1,468 1,164
- ------------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (93) (85) (182) (169)
Other income (expense) - net 2 1 (8) 1
- ------------------------------------------------------------------------------------
Total other income (expense) (91) (84) (190) (168)
- ------------------------------------------------------------------------------------
Income Before Income Taxes 639 370 1,278 996
- ------------------------------------------------------------------------------------
Income Taxes 237 142 474 373
- ------------------------------------------------------------------------------------
Net Income $ 402 $ 228 $ 804 $ 623
- ------------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
- ------------------------------------------------------------------------------------
BALANCE SHEETS
Dollars in millions
- ------------------------------------------------------------------------------------
<CAPTION>
June 30, December 31,
-------------- --------------
1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 65 $ 79
Accounts receivable - net of allowances for
uncollectibles of $46 and $33 1,841 1,819
Prepaid expenses 278 156
Deferred charges 47 39
Deferred income taxes 286 192
Other current assets 149 167
- ------------------------------------------------------------------------------------
Total current assets 2,666 2,452
- ------------------------------------------------------------------------------------
Property, Plant and Equipment - at cost 31,986 31,011
Accumulated depreciation and amortization 19,101 18,460
- ------------------------------------------------------------------------------------
Property, Plant and Equipment - Net 12,885 12,551
- ------------------------------------------------------------------------------------
Other Assets 10 11
- ------------------------------------------------------------------------------------
Total Assets $ 15,561 $ 15,014
- ------------------------------------------------------------------------------------
Liabilities and Shareowner's Equity
Current Liabilities
Intercompany loans $ 1,399 $ 473
Current portion of long-term obligations 58 172
- ------------------------------------------------------------------------------------
Debt maturing within one year 1,457 645
Accrued taxes 712 442
Accounts payable and accrued liabilities 2,148 2,599
- ------------------------------------------------------------------------------------
Total current liabilities 4,317 3,686
- ------------------------------------------------------------------------------------
Long-Term Debt 4,585 4,824
- ------------------------------------------------------------------------------------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 506 383
Postemployment benefit obligation 2,532 2,574
Unamortized investment tax credits 208 224
Other noncurrent liabilities 289 305
- ------------------------------------------------------------------------------------
Total deferred credits and other noncurrent liabilities 3,535 3,486
- ------------------------------------------------------------------------------------
Shareowner's Equity
Common stock - one share, no par value 1 1
Paid-in surplus 2,845 2,745
Retained earnings 278 272
- ------------------------------------------------------------------------------------
Total shareowner's equity 3,124 3,018
- ------------------------------------------------------------------------------------
Total Liabilities and Shareowner's Equity $ 15,561 $ 15,014
- ------------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
- -----------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
- -----------------------------------------------------------------------------
Six months ended
June 30,
--------------------
1998 1997
- -----------------------------------------------------------------------------
Operating Activities
Net income $ 804 $ 623
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 976 965
Provision for uncollectible accounts 63 59
Amortization of investment tax credits (16) (16)
Deferred income tax expense 26 69
Other - net (486) (218)
- -----------------------------------------------------------------------------
Total adjustments 563 859
- -----------------------------------------------------------------------------
Net Cash Provided by Operating Activities 1,367 1,482
- -----------------------------------------------------------------------------
Investing Activities
Construction and capital expenditures (1,246) (1,251)
- -----------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,246) (1,251)
- -----------------------------------------------------------------------------
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less 926 492
Issuance of other short-term borrowings - 120
Repayment of other short-term borrowings - (195)
Issuance of long-term debt 195 -
Repayment of long-term debt (558) (1)
Dividends paid (798) (807)
Equity received from parent 100 155
- -----------------------------------------------------------------------------
Net Cash Used in Financing Activities (135) (236)
- -----------------------------------------------------------------------------
Net decrease in cash and cash equivalents (14) (5)
- -----------------------------------------------------------------------------
Cash and cash equivalents beginning of year 79 69
- -----------------------------------------------------------------------------
Cash and Cash Equivalents End of Period $ 65 $ 64
- -----------------------------------------------------------------------------
Cash paid during the six months ended June 30 for:
Interest $ 194 $ 169
Income taxes $ 151 $ 128
See Notes to Financial Statements.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
- --------------------------------------------------------------------------
STATEMENT OF SHAREOWNER'S EQUITY
Dollars in millions
(Unaudited)
- ----------------------------------------------------------------------------
Common Paid-in Retained
Stock Surplus Earnings
- ----------------------------------------------------------------------------
Balance, December 31, 1997 $ 1 $ 2,745 $ 272
Net income - - 804
Dividend to shareowner - - (798)
Equity received from parent - 100 -
- ----------------------------------------------------------------------------
Balance, June 30, 1998 $ 1 $ 2,845 $ 278
- ----------------------------------------------------------------------------
See Notes to Financial Statements.
* * * *
SELECTED FINANCIAL AND OPERATING DATA
At June 30, or for the six months then ended: 1998 1997
------- -------
Debt ratio.......................................... 65.92% 66.22%
Network access lines in service (000)............... 16,144 15,345
Access minutes of use (000,000)..................... 30,865 29,136
Resold lines (000).................................. 393 77
Number of employees................................. 50,830 50,670
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions
1. BASIS OF PRESENTATION Southwestern Bell Telephone Company (SWBell) is a
wholly-owned subsidiary of SBC Communications Inc. (SBC). The financial
statements have been prepared by SWBell pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC) and, in the opinion of
management, include all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the results for the interim periods
shown. Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to such SEC
rules and regulations. Certain reclassifications have been made to the 1997
consolidated financial statements to conform with the 1998 presentation. The
results for the interim periods are not necessarily indicative of results for
the full year. The financial statements contained herein should be read in
conjunction with the financial statements and notes thereto included in
SWBell's 1997 Annual Report on Form 10-K filed with the SEC. Comprehensive
income for SWBell is the same as net income for all periods presented.
2. COMPLETION OF MERGER On April 1, 1997, SBC and Pacific Telesis Group (PAC)
completed the merger of an SBC subsidiary with PAC, in a transaction in which
each outstanding share of PAC common stock was exchanged for 1.4629 of a
share of SBC common stock (equivalent to approximately 626 million shares;
both the exchange ratio and shares issued have been restated to reflect SBC's
first quarter 1998 two-for-one stock split, effected in the form of a stock
dividend). With the merger, PAC became a wholly-owned subsidiary of SBC. The
transaction was accounted for as a pooling of interests and a tax-free
reorganization.
Post-merger initiatives
During the second quarter of 1997, SBC announced several strategic decisions
resulting from the merger integration process that began with the April 1,
1997 closing of its merger with PAC. The decisions resulted from an extensive
review of operations throughout the merged company and include significant
integration of operations and consolidation of some administrative and
support functions. In connection with these initiatives, SWBell recognized
several charges during the second quarter. Following is a discussion of the
most significant of these charges.
Reorganization SBC is centralizing several key functions that will support
the operations of SWBell, Pacific Bell (PacBell, which also includes its
subsidiaries) and Nevada Bell, including network planning, strategic
marketing and procurement. It is also consolidating a number of
corporate-wide support activities, including research and development,
information technology, financial transaction processing and real estate
management. SWBell, PacBell, and Nevada Bell will continue as separate legal
entities. These initiatives are resulting in the creation of some jobs and
the elimination and realignment of others, with many of the affected
employees changing job responsibilities and in some cases assuming positions
in other locations.
SWBell recognized a charge of approximately $57 ($36 net of tax) during the
second quarter of 1997 in connection with these initiatives. This charge was
comprised mainly of postemployment benefits, primarily related to severance.
Other charges arising out of the merger related to relocation, retraining and
other effects of consolidating certain operations are being recognized in the
periods those charges are incurred.
Impairments/asset valuation As a result of SBC's merger integration plans,
strategic review of domestic operations and organizational alignments, SWBell
reviewed the carrying value of related long-lived assets. This review
included estimating remaining useful lives and cash flows. Where this review
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions
indicated impairment, discounted cash flows related to those assets were
analyzed to determine the amount of the impairment. As a result of these
reviews, in the second quarter of 1997 SWBell wrote off some assets and
recognized impairments to the value of other assets with a combined charge of
$84 ($51 after tax), including the write off of voice dial equipment which
will be discontinued.
3. SOFTWARE COSTS SWBell currently expenses costs as incurred for software
purchased or developed for internal use, except for initial operating
software costs, which are capitalized and amortized over the lives of the
associated hardware. The American Institute of Certified Public Accountants
has issued a Statement of Position (SOP) that requires capitalization of
certain computer software expenditures beginning in 1999, with earlier
adoption permitted.
SWBell did not elect to early adopt the provisions of the SOP. Management is
currently evaluating the impact of the change in accounting required by the
SOP, but is not able to quantify the effect at this time. The SOP would tend
to cause an increase in net income in the first year of adoption.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
RESULTS OF OPERATIONS
Overview Financial results for Southwestern Bell Telephone Company (SWBell) for
the first six months of 1998 and 1997 are summarized as follows:
- ---------------------------------------------------------------------------
Six-Month Period
-----------------------------
Percent
1998 1997 Change
- ---------------------------------------------------------------------------
Operating revenues $ 5,449 $ 5,077 7.3%
Operating expenses $ 3,981 $ 3,913 1.7%
Net income $ 804 $ 623 29.1%
===========================================================================
SWBell's net income for the first six months of 1997 includes after-tax charges
of $139 reflecting strategic initiatives resulting from SBC Communications
Inc.'s (SBC) comprehensive review of operations of the merged company and the
impact of several regulatory rulings during the second quarter of 1997.
Excluding these 1997 charges, SWBell reported net income of $804 for the first
six months of 1998, 5.5% higher than the first six months of 1997 net income of
$762.
Excluding these charges, the primary factors contributing to the increase in net
income during the first six months of 1998 was growth in demand for services and
products.
Operating Revenues SWBell's operating revenues for the first six months of 1997
reflect reductions of $67 related primarily to the impact of several regulatory
rulings during the second quarter of 1997. Excluding these items, SWBell's
operating revenues increased $305, or 5.9%, for the first six months of 1998.
Components of operating revenues for the first six months of 1998 and 1997 are
as follows:
- ----------------------------------------------------------------------------
Six Month Period
------------------------------
Percent
1998 1997 Change
- ----------------------------------------------------------------------------
Local service $ 2,780 $ 2,561 8.6%
Network access:
Interstate 1,179 1,083 8.9
Intrastate 552 540 2.2
Long-distance service 381 416 (8.4)
Other 557 477 16.8
- -------------------------------------------------------------------
Total $ 5,449 $ 5,077 7.3%
============================================================================
Local service revenues increased in the first six months of 1998 due
primarily to increases in demand totaling more than $176, including
increases in access lines and vertical services revenues. The number of
access lines increased by 5.2% since June 30, 1997, of which 69% was due
to growth in Texas. Approximately 30% of access line growth was due to
sales of additional access lines to existing residential customers.
Vertical services revenues, which include custom calling services, call
control options, Caller ID and other services, increased by approximately
15% totaling more than $460 for the first six months of 1998. Revenues
also increased by the introduction and deployment of extended local area
service plans in 1998 of approximately $16, resulting in a shift of
revenue from long-distance service to local service. The overall increase
in total operating
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
RESULTS OF OPERATIONS - Continued
revenues was approximately $7. Additionally, Federal payphone
deregulation implemented in April 1997 increased local service revenues by
approximately $59 and decreased interstate network access by
approximately $11; the overall impact was an increase of approximately
$48 in total operating revenues. These increases were partially
offset by a reduction of approximately $44 in cellular interconnection
rates in the third quarter of 1997.
Network access Interstate network access revenues for 1997 reflect charges
of $52 due to the adverse impacts of several regulatory issues. These
issues include among other items, recovery of certain employee-related
expenses and the productivity factor adjustment in the Federal price cap
filing. Without these impacts, interstate network access revenues
increased $44 in the first six months of 1998 due largely to increases in
demand for access services by interexchange carriers and growth in
revenues from end-user charges, attributable to an increasing access line
base totaling more than $108. Also contributing to the increase was the
absence of approximately $22 of the 1997 revenue offset required for net
payments for long-term support which were designed to subsidize universal
service. This change is discussed further in Cost of services and products
below. Partially offsetting these increases were the effects of the 1997
rate reduction of approximately $70 related to the Federal productivity
factor adjustment, as discussed in SWBell's 1997 Annual Report on Form
10-K and payphone deregulation of approximately $11 referred to above in
local service.
Intrastate network access revenues increased slightly in the first six
months of 1998 as increases in demand, totaling approximately $17,
including usage by alternative intraLATA toll carriers, were partially
offset by net price decreases of approximately $6 resulting from 1997
state regulatory rate orders.
Long-distance service revenues decreased in the first six months of 1998
due to the effect of price competition from alternative intraLATA toll
carriers and regulatory rate orders totaling more than $21. Additionally,
the introduction and deployment of extended area local service plans
reduced long-distance service revenues by approximately $9, as discussed
in Local service above.
Other operating revenues for 1997 reflect charges of $11 due to the impact
of several regulatory issues. Excluding these impacts, other operating
revenues increased $69 in the first six months of 1998. Approximately 75%
of this increase was due to increased demand for nonregulated services and
products.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
RESULTS OF OPERATIONS - Continued
Operating Expenses SWBell's operating expenses in the first six months of 1997
reflect $147 of charges related to SBC's strategic initiatives and a
comprehensive review of operations of the merged company. Excluding these second
quarter of 1997 charges, SWBell's operating expenses increased $215, or 5.7%,
for the first six months of 1998. Components of operating expenses for the first
six months of 1998 and 1997 are as follows:
- ---------------------------------------------------------------------------
Six-Month Period
-----------------------------
Percent
1998 1997 Change
- ---------------------------------------------------------------------------
Cost of services and products $ 2,091 $ 1,908 9.6%
Selling, general and administrative 914 1,040 (12.1)
Depreciation and amortization 976 965 1.1
- ------------------------------------------------------------------
Total $ 3,981 $ 3,913 1.7%
===========================================================================
Cost of services and products for the first six months of 1998 increased
$183, or 9.6%, over the first six months of 1997. This increase was due
primarily as a result of increases in network expansion and maintenance,
and additional costs associated with reciprocal compensation for the
termination of Internet traffic (see Interconnection under the Competitive
and Regulatory Environment section for further discussion) which totaled
more than $74. Also contributing to the increase were increased expenses
related to Federal Universal Service Fund charges implemented January 1,
1998 of approximately $42, which replaced the 1997 net payments for
long-term support and were accounted for as an offset against interstate
network access revenues. The current system assesses charges recorded as
expense, and any amount to be received separately. Previously, a net
payment receipt for long-term support would be recorded as an offset to
(or increase in) revenue. Other factors increasing expenses were employee
training, merger implementation costs and right-to-use fees, partially
offset by reductions in employee benefit expenses, which resulted in a net
increase of approximately $36. Expenses related to implementing customer
number portability were comparable between 1998 and 1997.
Selling, general and administrative expense for the first six months
reflect second quarter 1997 one-time charges of $110 including the $57
charge relating to the reorganization (see Note 2 to the financial
statements). Excluding these charges, selling, general and administrative
expense decreased $16, or 1.7%, in the first six months of 1998, due
primarily to reductions in contract labor, sales commissions and costs for
research and development services which totaled approximately $94. These
reductions were partially offset by an increase in costs of merger
implementation, other costs associated with the consolidation of
operations since the merger and increased other taxes totaling
approximately $83. A lower level of expense has resulted during 1998 from
merger initiatives that have already been implemented.
Depreciation and amortization for the first six months of 1997 reflects
one-time charges of $37 for the write off of voice dial equipment which
was discontinued. Excluding this charge, depreciation and amortization
increased $48, for the first six months of 1998 due primarily to increased
depreciation expense of $31 resulting from growth in plant levels. The
remainder of the increase was due to rate variances related to the net
impact of revised composite rates.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
RESULTS OF OPERATIONS - Continued
Income Tax expense for the first six months of 1997 reflect the tax effect of
charges for strategic initiatives resulting from SBC's comprehensive review of
operations of the merged company and the impact of several regulatory rulings.
Excluding these items, income taxes for the first six months of 1997 would have
been $448. Income taxes for the first six months of 1998 were higher due
primarily to higher income before income taxes.
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
COMPETITIVE AND REGULATORY ENVIRONMENT
Interconnection Reciprocal compensation is billed to SWBell by Competitive Local
Exchange Carriers (CLECs) for the termination of certain local exchange traffic
to CLEC customers. SBC believes that under the Telecommunications Act of 1996
the state commissions only have authority to order reciprocal compensation for
local traffic, while only the Federal Communications Commission (FCC) has
authority over interstate and interexchange traffic, which is where SBC believes
most Internet traffic terminates. The question of whether Internet
communications should be classified as local or interstate traffic for
reciprocal compensation purposes is the subject of a pending FCC proceeding and
the FCC is expected to rule on the issue in the near future.
State commissions in Texas, Missouri, and Oklahoma have issued orders finding
that SWBell is required to pay CLECs reciprocal compensation for the termination
of Internet traffic to Information Service Providers (i.e. Internet Access
Service Providers). In June 1998, a U.S. District Court in Texas affirmed the
Texas Public Utility Commission's (TPUC) determination, and upheld payment of
reciprocal compensation, holding that the TPUC had jurisdiction over the local
portion of the traffic and the FCC over the Internet component.
Similar treatment of Internet traffic has been applied in Missouri and Oklahoma
with respect to reciprocal compensation arrangements. In Missouri, the Missouri
Public Service Commission has ordered that reciprocal compensation for Internet
traffic should be paid at least until the FCC decides whether such traffic
should be considered local or interstate for purpose of reciprocal compensation.
SBC has sought review or reconsideration of all of these cases. SBC's
subsidiaries have been recording amounts sought by the CLECs for the termination
of Internet traffic to Internet Service Providers as they have been billed.
Long-distance Application SBC continues to seek entry into interLATA
long-distance by requesting favorable recommendation from state commissions and
approval from the FCC, and as necessary through the courts. In response to a
July 1998 TPUC initial report, SWBell has begun collaborative efforts with the
TPUC and competitors to provide additional evidence regarding SWBell's checklist
compliance efforts. A final vote by the TPUC on whether to recommend SWBell's
application to the FCC is expected by the end of 1998.
OTHER BUSINESS MATTERS
New Accounting Standards In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133) that will require all derivatives to be recorded on the
balance sheet at fair value, and will require changes in the fair value of the
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS - Continued
derivatives to be recorded in net income or comprehensive income. FAS 133 must
be adopted for years beginning after June 15, 1999, with earlier adoption
permitted. Management is currently evaluating the impact of the change in
accounting required by FAS 133, but is not able to quantify the effect at this
time.
See Note 3 to the Financial Statements for a discussion of the new accounting
standard on software costs.
Employees On May 22, 1998, members of the Communications Workers of America
(CWA) ratified the tentative labor agreement that was reached on April 7, 1998
between SWBell and the CWA. The new agreement covers approximately 40,000
employees of SWBell through April 1, 2001. Among other items, the agreement
specifies an 11% increase in wages over the life of the contract.
SBC's Year 2000 Project SBC operates numerous date-sensitive computer
applications and systems throughout its businesses. Since 1996, SBC has been
working to upgrade its networks and computer systems to properly recognize the
Year 2000 and continue to process critical operational and financial
information. SBC has formed companywide teams to address and resolve Year 2000
issues, and processes have been developed to evaluate and manage the risks
and costs associated with preparing all of its systems and applications for the
new millennium.
SBC is using a four-step methodology for addressing the issue. The methodology
includes inventory and assessment, hardware and software fixes, testing and
deployment. SBC measures its progress by the number of systems addressed.
Inventory and assessment includes the identification of items (i.e.,
line-by-line review of software code, switch generics, etc.) that could be
impacted by the Year 2000 and the determination of the work effort required to
get them ready. These activities are nearly complete. For all of SBC, this
process involves reviewing over 300 million lines of software code, 1,100
central office switches, 6,800 company buildings, conducting an inventory and
assessment of 100,000 personal computers, and coordinating with its 900
suppliers of 12,000 products to obtain adequate assurance they will be compliant
with the Year 2000 or determine and address any appropriate contingency plans or
back up systems.
Hardware and software fixes are the activities that will be required to modify
program code, upgrade computer software and upgrade or replace hardware. As of
June 30, 1998, nearly half of the systems to be addressed by these activities
were complete.
Testing involves ensuring that hardware and software fixes will work properly in
1999 and beyond and occurs both before and after deployment. Testing began early
in 1998 and will continue through 1999 to allow for thorough testing before the
Year 2000. Any need for contingency plans or back-up systems would be determined
and addressed during the testing phase.
Deployment is the installation of hardware and software components in a live
environment. Nearly half of the systems deployment were completed as of June 30,
1998.
Total expenses for all of SBC's Year 2000 project have been estimated to be less
than $250, and SBC has incurred approximately $60 through June 30, 1998.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS - Continued
The activities involved in SBC's Year 2000 project necessarily involve estimates
and projections, as described above, of activities and resources that will be
required in the future. These estimates and projections could change as work
progresses on the project.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
PART II - OTHER INFORMATION
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in the reported market risks of financial
instruments since the end of the most recent fiscal year.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12 Computation of Ratios of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southwestern Bell Telephone Company
August 13, 1998 /s/ Richard G. Lindner
-----------------------
Richard G. Lindner
Vice President and Chief Financial
Officer (Principal Accounting/
Financial Officer)
<TABLE>
EXHIBIT 12
SOUTHWESTERN BELL TELEPHONE COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
<CAPTION>
----------------------- -------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------------------- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Before Income Taxes,
Extraordinary
Loss and Cumulative Effect of
Accounting Changes $ 1,278 $ 996 $ 1,888 $ 2,168 $ 1,688 $ 1,586 $ 1,424
Add:Interest Expense 182 169 343 327 340 358 385
1/3 Rental Expense 21 19 41 33 26 25 23
--------- --------- ---------- ---------- ---------- ----------- -----------
Adjusted Earnings $ 1,481 $ 1,184 $ 2,272 $ 2,528 $ 2,054 $ 1,969 $ 1,832
========= ========= ========== ========== ========== =========== ===========
Total Interest Charges $ 194 $ 181 $ 370 $ 348 $ 340 $ 358 $ 385
1/3 Rental Expense 21 19 41 33 26 25 23
--------- --------- ---------- ---------- ---------- ----------- -----------
Adjusted Fixed Charges $ 215 $ 200 $ 411 $ 381 $ 366 $ 383 $ 408
========= ========= ========== ========== ========== =========== ===========
Ratio of Earnings to Fixed Charges 6.89 5.92 5.53 6.64 5.61 5.14 4.49
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SOUTHWESTERN BELL TELEPHONE COMPANY'S JUNE 30, 1998 FINANCIAL STATEMENTS ON
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 65
<SECURITIES> 0
<RECEIVABLES> 1,887
<ALLOWANCES> 46
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 2,666
<PP&E> 31,986
<DEPRECIATION> 19,101
<TOTAL-ASSETS> 15,561
<CURRENT-LIABILITIES> 4,317
<BONDS> 4,585
0
0
<COMMON> 1
<OTHER-SE> 3,123
<TOTAL-LIABILITY-AND-EQUITY> 15,561
<SALES> 0<F2>
<TOTAL-REVENUES> 5,449
<CGS> 0<F3>
<TOTAL-COSTS> 2,091
<OTHER-EXPENSES> 976
<LOSS-PROVISION> 63
<INTEREST-EXPENSE> 182
<INCOME-PRETAX> 1,278
<INCOME-TAX> 474
<INCOME-CONTINUING> 804
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 804
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> THIS AMOUNT IS IMMATERIAL.
<F2> NET SALES OF TANGIBLE PRODUCTS IS NOT MORE THAN 10% OF TOTAL OPERATING
REVENUES AND THEREFORE HAS NOT BEEN STATED SEPARATELY IN THE FINANCIAL
STATEMENTS PURSUANT TO REGULATION S-X, RULE 5-03(B). THIS AMOUNT IS
INCLUDED IN THE "TOTAL REVENUES" TAG.
<F3> COST OF TANGIBLE GOODS SOLD IS INCLUDED IN COST OF SERVICES AND PRODUCTS
IN THE FINANCIAL STATEMENTS AND THE "TOTAL-COST" TAG, PURSUANT TO
REGULATION S-X,RULE 5-03(B).
</FN>
</TABLE>
